LLC 15% pass through vs Sole Proprietorship 20% passthrough

MedSupMan

Expert
24
Curious if you folks have an opinion on this. I was just looking into creating an LLC S-corp and saw that there is a 15% passthrough deduction and then I read creating a Sole Proprietorship can claim a 20% deduction.

If Sole Proprietorships allow the extra 5% tax deduction, why are the LLC and S-corps so popular?

The only extra benefit for LLC's seem to be liability. I've heard that the E&O insurance we buy isn't worth much in terms of protection, so maybe the LLC liability protection would be worth giving up the additional 5%. But if someone makes 200k per year or builds a renewal business of substantial size that 5% extra can be real money.

BTW, I was looking at Legal Zoom and Incfile.com

I know I need to talk to an accountant but one thing I read is that accountants are like any profession, there are good ones and mediocre ones -- good advice and not-so-good advice.

Any opinions are appreciated.
 
Thanks Somarco. I was doing the LLC or Sole Proprietorship for the 15% or 20% tax pass through mainly.
 
The only extra benefit for LLC's seem to be liability. I've heard that the E&O insurance we buy isn't worth much in terms of protection, so maybe the LLC liability protection would be worth giving up the additional 5%

Hence the reason for my earlier response . . .
 
The primary benefit (imho) of the s-corp is that you set a reasonable salary (subject to regular payroll withholdings) and a distribution.

That distribution holds the tax savings.
 
It would be interesting to know how many of you independent agents have set up an LLC with S corp election vs doing nothing.

If you're independent (without legally setting up a sole proprietorship) my understanding is you will also get to use the 20% pass through. Am I wrong?

Strange I should see this thread today when I'm mulling over with the advice of a CPA to set up the LLC and file as S corp. I have until March 15th to back date to Jan 1. I see the advantages but being a very skeptical person also this recommendation puts hundreds more in my CPA's pocket each year. If I still get a pass through as independent and pay a little more self employment taxes quarterly then the more self employment I pay will raise my social security next year and if I go with his suggestion and take a small salary then distributions I won't have to pay the self employment tax on would be defeating the purpose of a raise in social security in a year or two and end up being out more money in the end.

What do you all think?
 
It would be interesting to know how many of you independent agents have set up an LLC with S corp election vs doing nothing.

If you're independent (without legally setting up a sole proprietorship) my understanding is you will also get to use the 20% pass through. Am I wrong?

Strange I should see this thread today when I'm mulling over with the advice of a CPA to set up the LLC and file as S corp. I have until March 15th to back date to Jan 1. I see the advantages but being a very skeptical person also this recommendation puts hundreds more in my CPA's pocket each year. If I still get a pass through as independent and pay a little more self employment taxes quarterly then the more self employment I pay will raise my social security next year and if I go with his suggestion and take a small salary then distributions I won't have to pay the self employment tax on would be defeating the purpose of a raise in social security in a year or two and end up being out more money in the end.

What do you all think?

I have not set up an LLC with S-Corp - all I have is S-Corp. I'm really not sure what the benefit of the LLC would be...

I can tell you this - a reasonable salary for an insurance agent is not astronomical - many agents don't earn a lot. My first year as an s-corp my "salary" was around $30k. It's gone up a "reasonable" amount each year.

But if you aren't new - let's say you pay yourself $60k-80k salary as you have experience. That's the W2 wage. But, you're profitable, the S-Corp makes some cash, you have some expenses, some future marketing to pay for in business savings, and then leftover - which you distribute to yourself by writing yourself a distribution check. No taxes taken out.

I've heard some people distribute more than their salary. I don't do that, I may be too conservative, but it is what it is.

I agree on that the CPA earns more when we do this - mine runs my payroll monthly for myself and my wife (ahem, administrative assistant) and they do everything for the local taxes for us so we don't have to do a thing.

I just think that the distribution - and payroll savings - is where the real value is. I've heard that the s-corp is not a good idea compared to sole-prop when the revenue is under 100k. Over 100k, it is a good idea. But that's just a rule of thumb someone gave me a few years ago.

--

As far as payroll and social security benefits - it's not something I've factored in. I'm 34 and I'm not really banking on SS - I want the most $ now - your situation and age may make it more of a factor? I don't really know.
 
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